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The U.K. accounting regulator wants companies to include in their financial reports
information about any significant impacts that the country’s departure from the European
Union could produce.

“When Brexit risks are material, we encourage companies to disclose these as part
of their principal risks and uncertainties in the strategic report,” the U.K. Financial
Reporting Council
(FRC) told Bloomberg BNA in a July 27 email response to questions.

U.K. government rules require certain companies, as part of their annual reports,
to include a strategic report providing information that enables shareholders to better
assess how a company is performing.

The U.K. affiliate of Microsoft Corp. and U.K. company Virgin Atlantic declined to
respond to Bloomberg BNA questions about how they might address in their financial
reporting Brexit’s potential effects.

The Confederation of Business Industry, a U.K. employers group, said in a July 27
email that concerns about Brexit’s effect on financial reporting is “not something
that members have brought to our attention.”

Report Brexit Impact Details

The FRC, which establishes and enforces U.K. accounting, auditing and actuarial standards,
has written to companies “asking them to pay particular attention to potential risks
arising from Brexit”
and to ensure that their financial statements reflect significant impacts and uncertainties,
FRC said in its 2016/17 annual report.

Representatives from the U.K.'s governing Conservative Party are carrying out negotiations
with EU officials on Brexit. Both sides expect the U.K. to leave the EU by March 2019.

Brexit could produce broad macro-economic risks or uncertainties, along with risks
specific to particular companies or industry sectors, FRC said in its July 2016 guidance
on financial reports.

FRC recommended in the guidance that companies stay away from boilerplate, or overly
generalized, disclosures in their strategic reports.

“Company specific disclosures are more informative and useful to investors, for example,
the impact of trade agreements for companies with a high level of exports to Europe,”
according to the guidance.

Many U.K. businesses, however, have been slow to gauge potential effects of the country’s
divorce from the EU, the Institute of Chartered Accountants in England and Wales (ICAEW)
said in a report published July 17.

Fewer than half of the businesses that ICAEW surveyed have conducted meetings to discuss
the risks and opportunities that Brexit presents, and only 29 percent have forged
plans for responding to Brexit.

Insight From Virgin Atlantic

While declining to respond directly to Bloomberg BNA questions, Virgin Atlantic’s
2016 annual report offers insight into what shape Brexit disclosures in financial
reports might take in the coming years.

The airline took a financial hit when the value of pound sterling fell in 2016 following
the U.K. referendum to leave the EU, the annual report said, as the company derives
much of its revenue in pounds.

“To prepare for this risk, we took steps ahead of the EU Referendum to insure our
2016 income statement and balance sheet were mostly protected from exchange rate instability,
through currency hedging,” according to the annual report.

Virgin Atlantic said it plans to closely follow the effects of the Brexit talks, “as
their impact is a key area of focus for us.”

Other Uncertainties

FRC is facing its own uncertainties as the U.K.’s primacy enforcement organization,
or competent authority, for U.K. audits, as well its role as standard setter for the
nation’s accounting policies.

With the U.K.’s withdrawal from the EU, the council no longer will adopt and enforce
EU-approved international financial reporting standards after they’re transposed into
U.K. law.

FRC’s 2016/17 annual report listed as a principal risk to its long-term viability
“the uncertainty over the outcome of the negotiations for the UK’s exit from the EU.”

Still, the council expects business as usual for its activities post-Brexit.

“The FRC has considered the impact of the UK withdrawal from the EU for its own future,
and will operate on the basis that it will remain the UK Competent Authority for audit
regulation and continue its regulatory role for corporate governance and reporting
and for actuarial standards and oversight,” the council’s email said.

FRC currently is carrying out a review focusing on principal risk disclosures tied
to Brexit and said it “will report on these in due course.”

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